CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsHard
A city government is preparing its government-wide financial statements. It owns a municipal golf course that is accounted for as an Enterprise Fund. The golf course has capital assets with a book value of $5,000,000, financed by $3,000,000 in general obligation bonds and $2,000,000 from golf course operating revenues. How would the 'Net Investment in Capital Assets' component of Net Position be reported for the golf course in the government-wide Statement of Net Position, assuming no other relevant transactions?
- A$5,000,000
- B$2,000,000
- C$0
- D$3,000,000
Show answer & explanationAnswer & explanation
Correct answer: A. $5,000,000
Net Investment in Capital Assets is calculated as capital assets less accumulated depreciation, less outstanding debt incurred to acquire, construct, or improve those capital assets. In this case, the capital assets ($5,000,000) are reduced by the related debt ($3,000,000). The remaining $2,000,000 financed from operating revenues is also part of the net investment.
Why the other options are wrong
- B. This is correct. Net Investment in Capital Assets is calculated as the book value of capital assets ($5,000,000) less any outstanding debt directly related to those assets ($3,000,000). The $2,000,000 financed from operations is part of the equity in the assets, not debt to be subtracted. So, $5,000,000 - $3,000,000 = $2,000,000.
- C. This would imply that the capital assets are entirely offset by related debt or have no value, which is incorrect.
- D. This represents only the amount of debt incurred to finance the capital assets, not the net investment.
Net Investment in Capital Assets (Government-Wide)
A component of Net Position in government-wide financial statements, representing the capital assets of the government, net of accumulated depreciation, less any outstanding debt attributable to the acquisition, construction, or improvement of those assets.
- Calculated at the government-wide level (full accrual).
- Includes all capital assets, regardless of funding source.
- Reduced by outstanding debt directly associated with the assets.
Memory trick: Assets minus debt equals net investment, a true picture of ownership.